Ec4333 Lecture 4 2007 Final
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Transcript of Ec4333 Lecture 4 2007 Final
Economic Monetary UnionOptimal Currency Area Theory
Costs & Benefits of EMUAncient Rome
Lecture 6
Stephen Kinsellawww.stephen kinsella.net
Background
Free Movement of Capital
Coordination of Ec. PolicyIndependent Central Banks
The EuroCommon Monetary Policy
The ECB
1.
2.
3.
1990––1999
Benefits of a Single Currency
Inflation Convergence Within Six Original EMS Members, 1978-2000
Less transactions costs
More price transparency
Less uncertainty
More economic growth
So ....
Elimination of foreign exchange markets within union eliminates cost of exchanging one currency into another
Cost reductions amount to 0.25 to 0.5% of GDP
Less transactions costs
One common unit of account facilitates price comparisons
Consumers “shop around” more
Competition increases
Prices decline and consumers gain
Price transparency
Large price differentials continue to exist
These have to do with
transactions costs at the retail level
and product differentiation
Will euro increase price transparency in a significant way?
Handout
Less Uncertainty
Does the decline in exchange risk increase
welfare?
P P
Q Q
P1 P1P2
P3
MC MC
X
YA
A
Price Certainty Price Uncertainty
Profit = A-(Area of ) Profit = A-(Area of )+X+Y
Profits are higher on average when there is price certainty
Welfare will then depend on degree of risk aversion
If risk aversion sufficiently high price certainty is preferred by firms
More economic growth
Empirical evidence about monetary
union and growth
Next WeekBenefits & Costs of a Single Currency
We’ll develop Optimal Currency Area Theory
Read
Pelkmans, J. European Integration: Methods and Economic Analysis 1st ed., pgs. 83–104 and 133–155. 337.142 PEL.